Private equity investments in the payments sector in India fell to a five-year low in 2016 but mergers and acquisitions (M&As) held out hope as the government's demonetisation drive promises to give a boost to this emerging space within the broader financial services industry.

The number of private equity deals declined to 14 last year from 29 in 2015, according to VCCEdge, the data and research platform of News Corp VCCircle. The deal value also more than halved to $177.23 million in 2016 compared with $447.18 million in the previous year. However, deal value was the second highest in the last five years.

Funding in payments startups dried up in 2016 as volume fell 57.89% on a year-on-year basis. Overall, startups in payments space have received funding worth $159.71 million over 68 deals since 2012. This included Series B deals worth $81.93 million, Series A worth $58.47 million and angel/seed investments worth $19.31 million.

The funding winter in the payments space has continued into 2017 as well despite the government's decision to demonetise Rs 1,000 and Rs 500 notes late last year. So far in 2017, there have been only two PE deals worth $4.26 million—Kalaari Capital’s $3.59 million investment in Airpay Payments Services and Kstart Capital & Venture Highway’s $0.67 million in Delvit Solutions.

Since 2012, India’s payment sector has witnessed 96 private equity investment deals worth $845.18 million. General Atlantic and Temasek’s investment of $200 million in Billdesk; and Alibaba Group and Mediatek’s investment of $120 million in Paytm have been the only two investments worth above $100 million in the space since 2012.

More than 47% of PE deals in the space have involved Maharashtra-based startups, making it the hub of the payments space.

Roma Priya, legal adviser and founder, Burgeon BizSupport LLP, said deal volume could be lower because the sector already has some established players.

“There are already big players in the sector with Paytm's penetration having significantly spread in Tier II cities. Besides, Facebook is starting payments. This segment has a high-entry barrier now and hence deal volume was less,” she said.

Demonetisation is a recent move. So deal volume in the sector could pick up going forward as investors are upbeat on the fin-tech space, she said.

"Overall, we are moving towards a cashless society," she said.

M&As have been the bright spot in the space last year. A total of 15 deals worth $340.15 million were seen through 2016 to date this year. M&A deals totalled $1,057.96 mn in terms of value in the space during the period from January 2015 to date.

“Year 2017 looks to be a good period for consolidation in the space as there have been three deals worth $88 million so far this year,” the report said.